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Did you know that…
…if you own 20% or more of a business
(a corporation or limited liability company) and
your business borrows money from a bank, you will
most likely be asked to personally guarantee it?
…if your business fails to pay its
obligations, the bank could decide to pursue
you personally, rather than being
required to assemble and sell your business assets
first, or even at all?
…even though you own only 20% of the
company, the bank could decide to collect
100% of the obligation from you, particularly
if you have a nice, liquid savings account?
Sobering thoughts? You bet they are!
That said, since personal guarantees are a way of life
in the small business world, there are ways of
managing the risk of losing, through no fault of your
own other than being part of an uncertain economy, all
of your savings… maybe even your home.
First, let's understand why a personal guarantee is
requested so much (most) of the time and why you
should not be surprised or insulted when asked for
one.
Sometimes a bank is seeking to fill a perceived credit
gap, i.e., your business assets consist of office
equipment and not much else and you want to borrow
$500,000.00 for growth expansion. Sometimes it is a
"character" loan — almost no business assets
but your good character, and you want to borrow
$50,000.00 based upon that.
Second, are you aware that you can sometimes
negotiate the terms of a personal guarantee?
For instance, depending upon the strength of your
business credit, you can:
- try and negotiate it away. In my
experience, go for the gold and settle for the silver (if
you start with silver, you might not even end up with
bronze!).
- try and narrow the scope of the guarantee.
Ask the lender to release it after one full year of
timely payments, or when the obligation is reduced to
a certain amount, or to limit it to a certain percentage
of the obligation.
- try and get the guarantee divided into
percentages based on ownership. This way, if you
do in fact own just 20%, your obligation is for just 20%
of the guarantee.
Third, if you find yourself stuck with a personal
guarantee, think long and hard about how this may
affect you and your fellow business owners down the
road.
For instance, if both you and your partner agree to
sign a personal guarantee (something you want to
discuss with each other before you are sitting
in the bank, signing loan documents!), make sure
to consider the possible inequities of your individual
financial situations.
One of you may be single and thrifty — a home
with a lot of equity, a solid stock portfolio and a hefty
savings account, while the other may have a spouse,
several kids, a huge mortgage and no liquid assets.
Under these circumstances, who do you think the bank
would choose to pursue, in the event of a business
default? At that point, it's too late to wonder how to
recoup your 100% loss from your 50% partner!
My advice? Discuss it in advance and
document your agreement well before the cataclysmic
event occurs. The fewer unpleasant surprises
partners have to face, the more they have the
resources… financial, mental, emotional…
to face the everyday challenges that arise.
And that, after all, is the ultimate challenge.
Entering into a personal guarantee is just one of the
many contracts into which you, as a business owner,
will enter during the course of operating a company.
But it generally is the one with the most potential
for personal, financial impact. Many business
owners casually sign away on personal guarantees
without clearly understanding the breadth and scope of
this particular agreement. Don't you be one of
them!
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December 26, 2004 — Tsunami struck
South
Asia and East Africa… and The Red Cross was
there.
August 3, 2005 — Famine struck Niger
in
Africa… and The Red Cross was there.
August 29, 2005 — Massive hurricane
struck
Gulf Coast of the United States… and The Red
Cross was there.
October 8, 2005 — Earthquake struck
Pakistan… and The Red Cross was there.
October 10, 2005 — Torrential rains
and floods
struck New Hampshire … and The Red Cross was
there.
Last month, all we could think to do was stand in awe
of the need and give when we could. But the tragedies
nature has wrought on our neighbors here and around
the world, just in the past year alone, are unrelenting
and the resources have been stretched to the limit. We
write a check and then go back to our lives…
giving a thought to others when we turn on the
evening
news.
But this month, we're done talking at Widett and
McCarthy… we have come up with a simple
plan to give something back on a regular basis now
and through the end of the year. In recognition of
the need and in honor of our clients in whose success
we share and applaud, we pledge to give 10% of every
single client bill on which we receive payment during
the last quarter of 2005.
Since we understand that "imitation is the sincerest
form of flattery," we hope our readers will flatter us
by copying our plan and give to The Red Cross at www.redcross.org, at
whatever level they can, until the end of 2005. The
Red Cross is there when so many need them and the
need is so great… we will recognize that
incredible commitment with a small gesture of our
own… to help our global neighbors… in
honor of our clients.
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